A lot of things to think about today; March housing starts were weaker than expected, building permits also a little lite, March industrial production better than forecasts and capacity utilization at its best use since June 2008 at 79.2%. At 12:00 this afternoon Janet Yellen at the Economics Club of NY made another dove bird speech and later in the afternoon (2:00) the Fed Beige Book was released. There are days when there isn’t anything happening, today not the case.

Yellen said she is looking at three “big questions”; low interest rates, inflation and labor market slack to determine whether the economy is finally healthy enough for the central bank to begin raising rates. Yellen said a too-low inflation rate is a bigger worry than the Fed's easy-money policies sparking a surge in consumer prices. She also reiterated her arguments from a late-March speech that she sees quite a bit of slack left in the labor market in measures other than the official jobless rate, which stood at 6.7% in March. On questions about how long the Fed will keep interest rates at zero, she didn’t hesitate to comment that there is no reason now to worry about increasing rates anytime soon. In her opening speech she said the Fed doesn't expect to meet its dual mandate of full employment and price stability for "two to three years." Fed officials see full employment as being somewhere between 5.2% and 5.6%.

Yellen joined with Mario Draghi at the ECB on the issue of deflation; saying that persistently low inflation is worrying because it can lead to deflation, a broad decline in consumer prices that can be difficult to reverse and lead to "prolonged periods of very weak economic performance." But even if outright deflation is avoided, a long period of very low inflation can be risky as well, she said, in part because it makes it harder for households and businesses to pay off debts, potentially weighing on economic growth.

This afternoon’s Beige Book yielded these bullet points:

"Reports from the twelve Federal Reserve Districts suggest economic activity increased in most regions of the country since the previous report."

"Chicago reported that economic growth had picked up, and New York and Philadelphia indicated that business activity had rebounded from weather-related slowdowns earlier in the year."

"The Cleveland and St. Louis Districts both reported a decline in economic activity."

"Reports on residential housing markets varied. However, across most Districts, home prices rose modestly and inventory levels remained low."

"Loan demand strengthened since the previous Beige Book."

"In the energy industry, oil and natural gas production increased, while coal output continued to decline."

"Labor market conditions were mixed but generally positive."

"Prices were generally stable or slightly higher."

All of the above triggered a strong rally in the stock market today. The DJIA came within 200 points of its all-time high today. We don’t ever fight the tape so we are not ready to short the stock market, but we still believe the time is coming within the next month or two. This present rally, while not a fool’s rally, is built to very weak foundations with bets being laid that inflation will begin to increase to the Fed’s 2.0% target; we don’t agree. Inflation gains have been expected for two years, so far there has been low enough demand from consumers and businesses that inflation can’t increase much. In the EU that economy is moving ever closer to deflation and here unless there is a huge change among consumers, prices are stuck. No increase in inflation leads straight to economic decline. The US economy, while still improving is not even close to any sustainable prices; and if not for the Grand Experiment by central bankers equity markets would not be the only game in town as it is today. The longer a major shake out takes to engage, the bigger the decline in the stock indexes will occur. I am not smart enough to say particularly when the selling will take hold, but just as I wasn’t astute enough to know when the housing bubble would blow, our readers were well aware what we thought about liar loans, no down loans, and no underwriting and where it would lead. In that debacle that about sent the world into depression, until the end came only a handful were concerned that crap leads to more crap. In the current instance, the Fed and other central banks are way out on a limb with policies that have never been tried before---ever.

Tomorrow weekly jobless claims are expected to increase from 300K to 312K and the April Philly Fed business index is thought to be at 10.0 from 9.0 in March. Tomorrow trading should be lite trading as many will leave early for Easter weekend, the bond market is closed on Friday but those bulls are not going to relinquish any day of trading in the stock market.

The interest rate markets so far are not being impacted by the stock market gains, nor are they impacted on geo-political events in Ukraine. The 10 yr note is cemented in a 10 bp range and there hasn’t been much that can move it up until now. Stronger economic data, increased tensions yesterday in Ukraine, interest rates are very comfortable these days with little change. The technicals are holding slight bullish readings but as noted a couple of weeks ago, in a tight trade like we have currently the technicals are less valuable as predictors.